The Upside & Downside of Crowdfunding for Hardware Startups

With the exponential growth of crowdfunding, hardware startups are finding it easier to raise funds and launch their product into the marketplace. For instance, on Kickstarter in 2015, the amount of money going to funded projects increased by 35%, or $160 Million more than in 2014. There were 54,831 projects funded on Kickstarter in 2015, which is an increase of over 10,000 from the previous year. In addition, the Design and Technology categories were among the fastest growing segments.* Crowdfunding continues to grow in popularity and has transformed into a viable funding option for hardware entrepreneurs. However, like any type of business funding, crowdfunding has its upside and downside, and before you setup your campaign there are a few things to consider.

Upside of Crowdfunding

Crowdfunding is often viewed as a way to raise funds and validate your product idea (both of which are true and terrific for startups). However, there is one aspect that many hardware entrepreneurs fail to consider, it is the community support of your early-adopters. The influence that these backers have on the success of your crowdfunding campaign should not be taken lightly.

The early-adopters help create, define and market your product to a much larger audience. Through comments and feedback on your crowdfunding page, you will be able to get a firm grasp on your product-market fit; which in turn, will let you know if you are on the right path or if you need to pivot your current product and redesign your strategy. In this manner, crowdfunding is the culmination of the lean startup.

Through your early-adopters you also gain exposure that you would not have been able to receive if you went solely with the traditional Venture Capital (“VC”) funding route. The more exposure your campaign receives and the more public interest it garnishes, will undoubtedly affect your product’s funding. Recently, VCs have started paying close attention to successful campaigns as a way to evaluate a startup before investing their own funds. Hardware investors understand that crowdfunding campaigns give an advantage to startups because they speed up the market feedback process—which in turn, helps minimize a VCs potential investment risk.

Downside of Crowdfunding

Failed campaigns, wasted time and underestimated product development costs are crowdfunding downsides experienced by startups. When you are an early-stage startup there is nothing worse than failure and wasted time. To prepare for these potential missteps it is crucial that you plan ahead.

While a failed campaign can be attributed to a number of things, the most common factor is the lack of an engaging story. Early-adopters need to be motivated to invest in your product, and one way to do this is through an interesting campaign with a backstory that grabs their attention. Your “story delivery” also demonstrates to early-adopters that you have a strong marketing strategy that will translate well from your crowdfunding campaign and into the marketplace.

Another pitfall to avoid is asking for the wrong amount of funding. Estimating your total development costs can be tricky, but this risk can be minimized with the input from experienced team members and outside consultants. Manufacturing and packaging is one area that is particularly challenging for hardware entrepreneurs, and getting a firm “estimate” can be even harder. (Our advice, research potential manufacturers and meet with a variety of them before settling on one.) If your dollar estimate is off, it can sink even the best crowdfunding campaign.

Without and engaging story or correct project cost estimates you risk crowdfunding failure. The time you spend crowdfunding will be wasted, which can be detrimental for early-stage hardware startups.